What is co-insurance and why should you care?
If your benefits policy at work has an 80% co-insurance clause and you make a claim for $100, you will receive $80 from the insurer and pay $20 out of pocket.
Property Insurance works a different way, the insurer uses co-insurance to penalize underreporting of values .
Why Do They Do This?
People assume they will never have a total loss and therefore try to "negotiate" the values they insure. Someone with a $100,000 worth of contents would assume they rarely lose everything and decide to insure $50,000 worth of contents. If everything is lost ($100,000), $50,000 would be reimbursed and $50,000 would need to come out of pocket. With co-insurance this becomes a major issue in the event of a "partial loss".
Lets say a flood causes $50,000 worth of damage and there is an 80% co-insurance clause. One would assume they should receive $50,000? Wrong.
Co-insurance is based on the actual value of contents that should have been insured. In this situation an 80% co-insurance clause means $80,000 is the minimum which should have been insured. Insurers then use the following calculation:
DID INSURE /SHOULD INSURE X LOSS $50,000 / $80,000 X $50,000 = $31,250
$50,000 - $31,250 = $18,750
You would be expected to participate $18,750 in the event of a $50,000 loss if you should have insured $100,000.
Sounds unfair right? Not really.
Remember your health insurance policy with a 80% co insurance clause? If property insurance operated the same way it would be very expensive to make a claim. Instead, insurers are willing to provide coverage for a small deductible in the event of a claim, all they ask is consumers insure the right values...
What do you think?
The Base Team
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